Q. We plan to retire late next year and want to sell our debt-free residence and move immediately. We have considered a strategy that appears to have merit and would appreciate your comments on the following proposal. We would refinance our house now for the maximum amount possible at today's low interest rate so that we can offer a highly attractive assumption package next year, when interest rates are supposed to be climbing by two or more points. Upon refinancing, we would invest the total amount in a one-year tax-exempt investment, which would produce an after-tax yield that would substantially offset our monthly payments until this obligation is assumed by the purchaser. Please advise.
A. As this columnist has stated on numerous occasions, I am neither an economist nor a fortune teller -- and sometimes wonder whether there is a difference between those two groups.
However, there are several basic assumptions that I support, many of which are included in your strategy. One important concept is to pull your "dead equity" out of your house by refinancing. Another concept is to take advantage of what used to be called "creative financing" in order to accomplish and encourage the sale of your house.
In your letter you indicated a number of features of this plan, and perhaps the best way to respond is to highlight them one by one.
1. "Closing costs of refinancing would be less than full settlement costs as there would be no new purchaser involved." As a practical matter, the closing costs involved in refinancing would be almost the same as if you were selling the property. The only major items that would not have to be paid are the state recordation and transfer taxes, but depending on the jurisdiction in which you reside, there may be a fee charged in order to record your new deed of trust (mortgage). Thus, your first assumption is not completely correct.
2. "The points we would pay to refinance would not be any greater than those that would have been paid had there been no refinancing." I assume that you are comparing the situation where you refinance your house rather than sell it. Lenders generally do not care who pays the points. Often, when you sell your house, you negotiate payment of the points. I have seen cases where the seller pays all the points, and I have seen cases where the buyer pays all the points. Often, the parties to a sales transaction negotiate the payment of the points on some proportionate basis. In your case, however, since you would be refinancing, you would have to pay all of the points yourself.
3. "The tax benefits obtained by payment of closing costs and points would be a deduction against this year's pre-retirement income." Here, you are partially correct. The closing costs would not be deductible, but would be added to the tax basis of your house. The points that you paid would be deductible -- but only if you paid them separately to the lender, and only on a pro-rata basis over the life of the loan. Additionally, they could not be deducted from the refinanced proceeds.
4. "It would permit us to negotiate a substantially reduced fee with a real estate broker for the single service of bringing to us a purchaser, since the most difficult aspect of the transaction -- namely obtaining financing -- would not be needed." There are two fallacies in this statement. First, I seriously doubt that a real estate agent or broker would be willing to negotiate a substantially reduced commission merely because you may have the availability of assumable financing. The real estate broker would have to do everything he or she normally does to find a potential buyer. Many people are in your shoes, in that they have assumable financing, or indeed are willing to take back all of the financing. And indeed there are people who pay all cash for the house. Thus, the broker probably would charge you the same if you decide to use the services of a brokerage firm. Second, it should be noted that not every buyer would find your assumable financing attractive.
5. "We would have more latitude in concluding a sale at our price because we could negotiate limited financing of the amount outstanding beyond the assumption." This is accurate. If you are interested in taking back financing, and indeed if you do have an assumable loan, then you are an attractive seller and may be able to make a good deal with your purchaser.
6. "The transaction could be concluded with payment of only an attorney's fee instead of the full settlement costs that would have been required otherwise." This is not completely accurate. When you refinance your property, you will have to pay the settlement cost as outlined above, including attorneys' fees. When you sell the house, your purchaser also will have to pay settlement costs, which may or may not be negotiated between the two of you.
I have outlined some of the factors you have raised regarding your proposed plan. As you can see, I do not agree with all of the justifications given in support of your plan.
However, I do support the plan itself for other reasons.
You now have a house that is free and clear of any debt. Interest rates are now rather low, and although I have indicated I am not a fortune teller, I seriously doubt they will go much lower. Indeed, there is always the possibility that they will rise in the near future. Why not consider refinancing now, and get a one-year adjustable-rate mortgage (which currently can be obtained at less than 9 percent). While you certainly can put those proceeds in a tax-free investment for one year, why not consider buying the house now in which you plan to retire next year? If interest rates are low, you can benefit twice -- by refinancing and by immediately purchasing the new property.
Whether or not you are able to obtain an assumable mortgage would make no difference if you find the house in which you plan to retire. You can rent that house out for a year, and move in after you have sold your current residence.
There is one additional factor to be considered. Your entire plan was premised on the belief that you can obtain an assumable mortgage. I must point out that with the exception of VA or FHA loans, most mortgages today are not freely assumable. In my opinion, the adjustable-rate mortgage (ARM) is more suitable -- and less expensive -- than even the FHA or VA. And you may not be able to qualify for an FHA or VA loan, since there are limitations and restrictions on them.
Refinancing in today's market makes a lot of sense. You have the possibility of purchasing your retirement home at today's prices and at today's interest rates. I strongly suggest you consider that option.